Risk vs Reward: Which Marijuana Stocks Have the Most to Gain or Lose

Here are some things to consider before buying that medical marijuana stock

In early 2011, marijuana legalization measures — medical as well as recreational — were making their way to more ballots then they’d ever seen before. In fact, the movement began getting so much traction that by the end of the year, many investors had already picked their favorite medical marijuana stock like Medical Marijuana (MJNA), or perhaps were into names more aligned with recreational marijuana usage, such as GreenGroTechnologies (GRNH).

While only two states of the many that were voting on marijuana actually passed new laws allowing it, shareholders of the typical marijuana stock or medical marijuana stock have remained confident that more states will legalize marijuana. Some investors have even remained faithful that the federal government will eventually lift its nationwide ban … even if it’s not proactively enforcing most of its current laws.

For the average current (or potential) owner of a medical marijuana stock, the legalization battles present many risks, but also many opportunities. If it’s allowed in more states, most marijuana stocks could grow into their frothy valuations, or perhaps invite new — and bigger — players into the arena. If instead marijuana legalization efforts hit a wall, not only will bigger companies choose not to enter the market, but many of the existing smaller companies will find they’re unable to meet shareholder expectations.

On that note, there are two key details that investors need to understand if they currently own a medical marijuana stock, might own one in the near future, or still are looking for the best way to play the trend.

#1: So-called “big tobacco” isn’t going to be interested enough to wade into these waters without massive changes to not just most state laws, but federal law.

While it has been widely and repeatedly suggested cigarette companies like Altria Group (MO) and Philip Morris International (PM) want to get into this multibillion-dollar industry, neither Philip Morris nor Altria nor any of their peers have alluded to actually doing so.

The core of the hesitance likely stems from the fact that the U.S. government seem unwilling to budge on the legalization of marijuana. Although it currently chooses to look the other way as long if it seems the state in question is applying its own laws, that’s a choice that could change at any moment.

Big Tobacco doesn’t want to be caught on the wrong side of a newly enforced-but-existing federal law.

Simultaneously, though it hasn’t been a stated, explicit goal of state laws so far, it’s not a stretch to say that states are working to ensure the medical marijuana and recreational marijuana industries remain small, cottage-like businesses with limited scale. In Colorado, for instance, at least 70% of what a dispensary sells must be grown on-site. That’s not efficient by Big Tobacco standards. Indeed, it’s a logistical and corporate personality mismatch, with not enough clear and consistent margins with ownership of dispensaries and their growing effort.

#2: As is the case with any other publicly traded company, can the underlying company of a particular medical marijuana stock actually turn a profit?

Whether the typical medical marijuana stock is investment-worthy has little to do with marijuana being legalized in more and more states; it’s going to be legalized in more states as time goes on; the only question on that front is one of pacing.

The bigger core question is one of viability.

Reality: Many marijuana stocks fell into favor not because shareholders could expect growth and profits from them, but because that company’s product seemed “cool” or was backed by a good story.

Moreover, some growers who were little more than hobbyists (that didn’t care about turning a profit, or know how to turn a profit) also found themselves supported by public funding, whether merited or not.

In time, though, investors are going to care more about the quality of earnings than the quality of the growers’ marijuana or the company’s marijuana-based products. Once it becomes clear not all marijuana stocks are built the same, investors are going to proverbially separate the men from the boys.

With that being said, the industry’s top dogs and most troubling liabilities may be as follows:

Recreational and Medical Marijuana Winners

This isn’t the complete list of companies that stand to gain from the advent of legalized medical and recreational marijuana, though these companies represent a nice cross-section of the kinds of companies that are well-positioned for the foreseeable future. All have marketable products and an existing foothold in the industry.

GreenGro Technologies (GRNH): Technically speaking, the aforementioned GreenGro Technologies isn’t exactly a medical marijuana stock. It will benefit from the ongoing legalization of medical marijuana, however. The company sells growing equipment and has a long-established presence in that market.

Medical Marijuana (MJNA): As the name suggests, Medical Marijuana is – for the most part — a medical marijuana stock. The company has a hand in several aspects of the marijuana industry, but among its most novel are cannabinoid-infused beverages, candies, health supplements, balms and more.

Vapor Corp. (VPCO): Like GreenGro, Vapor Corp. (VPCO) doesn’t officially qualify as a medical marijuana stock. In fact, up until early this year it didn’t seem to want to identify itself with any part of the marijuana industry. The connection is undeniable though, and now, the connection is an asset more than a liability. Its vaporizer e-cigarette technology can successfully vaporize dry herbs, effectively creating a smokeless marijuana cigarette. The marketability of such a product has been nothing less than amazing.

Recreational and Medical Marijuana Losers

It is beyond the scope of this report to name a particularly poor medical marijuana stock. However, there are some common elements among most of the least attractive names within the marijuana business:

They have switched business lines very recently only to take advantage of marijuana mania.

They have established themselves as a marijuana investment only in vague ways, such as plans to consult with other budding marijuana names, or simply have plans to acquire and incubate so-far-unnamed medical marijuana companies.

They’re better at publishing a steady stream of press releases than making any actual, measurable progress.

Again, this is not an exhaustive list of potential winners nor of qualities of losers in light of the ongoing legalization of medical and recreational marijuana, nor would it be impossible for a medical marijuana stock mentioned above to move to the loser list should its situation change over time.

As it stands right now, however, the best and worst bets appear to be as described above.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.